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What can we expect from today's US CPI data?


Despite a rally on Wall Street in the last session, the upcoming US consumer price index (CPI) data may not give a hand to market bulls, as the upcoming data might not be as optimistic as projected.

The US inflation trajectory is still facing uncertainties amid recent strong labour markets, and a pickup in energy prices recently, which may put stocks' rally on pause should the CPI data come in higher-than-estimated. And signs in the markets indicate that the rebound in equities could face a bump on the road ahead. 

Spikes in the US bond yields

The US benchmark bond yields spiked after the US January job data as markets are now pricing in a slower exit of the Fed’s rate hike cycle after May at the earliest. The previous project was a rate hike pause after March and held throughout the year. The tight employment data helped improve the US economic outlook and pushed the bond yields and the US dollar. The US 10-year bond yield jumped from 3.4% to 3.7% in the last two weeks, and the US 2-year bond yield rose from 4.2% to 4.5% during the same timeframe. Today’s CPI could enhance this trend if the data provide an upside surprise. The consensus calls for a 6.2% increase in January year on year, a further down from 6.5% in December. 

Source: TradingView as of 14 Feb

Oil prices and energy stocks rebuild strength

Crude prices rebounded since the Fed’s policy meeting on 2 February, when the Reserve bank raised interest rates by 25 basis points and hinted that a rate-hike pause could be after March. However, the strong US non-farm payrolls data was a slap in its face and made the Fed officials turn around to ”higher for longer” rates guidance.

The inflation positively correlated commodities, and oil markets regained strength by climbing 9% in two weeks. The rebound in the oil markets suggests that the inflation trajectory maybe not be as ideal as said.

Source: CMC Markets NG as of 14 Feb

Following crude oil’s comeback, the energy sector gained momentum again in the S&P 500 in the past week, with the Energy Select Sector SPDR ETF (XLE) up 4.6%. In contrast, the typical growth sector, Telecommunication Services (XLC) down 3% in the last five days, suggesting the sector rotation has changed course amid the Fed’s tweaks. 

Source: CMC Markets NG as of 14 Feb

A potential pullback in Nasdaq

The above narrative may support a pullback in the tech-heavy index, Nasdaq due to re-rampant US bond yields and weakened sentiment in growth stocks. 

Source: CMC Markets NG as of 14 February

The index faced near-term resistance of 12,800, the high on 2 February, potentially further pulling back towards the 200-day moving average support of 11,900. Both MACD and RSI are in overbought territory, suggesting an upside momentum exhaustion. 

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